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Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

4. Merchandising Operations

Perpetual Inventory - Purchase Discounts

Any purchase discounts received for quick payment will reduce the cost of our Inventory.


Perpetual Inventory:Purchase Discounts

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Alright. So now let's see what happens when we get a purchase discount and this is a discount for paying quickly to our supplier. So you might have seen this already when we talked about sales discounts, if you haven't seen sales discounts yet I'm sure you will. Um But you're gonna see that it's very similar this lesson except now instead of talking about selling something and offering a discount to our customer now we're the customer and we're getting a discount from our supplier. So let's check it out in this situation. There's a special system used to denote discounts and let's go through it here. This is how you usually see a discount, you'll see 2 10 net 30. That's how you read that. The 2 10 and 30 the end stands for net just like you see in the second quote there. So let's see what these numbers mean. The numbers are what really matters. And what really matters is those first two numbers. Okay those are the most important ones. So the first two they're the 2 10 net 30. The two that's the percentage amount of discount that you're gonna get. Okay you're gonna get a 2% discount if you pay within 10 days. Okay? So the purchase happened on one day and now you have the next 10 days to pay and get a 2% discount. The 30. Well that's the total days you have to pay. Okay? So they told you if you pay within 10 days you can take a 2% discount but you have to pay us the full balance by the 30th day. So when we do our problems and we when we solve problems like this that 30 it doesn't really matter. Okay what's really the focus in this class is that percentage discount and whether they qualified for the discount right? Those first two numbers the two and the number of days that have passed. So let's check out this example Abc company purchased 300 units of product X for $1800 on january 14. The supplier offered terms of 3 10 net 45. Okay? So notice this is different than above. We saw 2 10 net 30 but the principles stay the same in this case we're talking about a 3% discount if you pay within 10 days and then a 45 total days to pay. But notice that that 45 we're not really gonna use it in the problem. So the supplier offers terms of 3 10 net 45. Abc company paid the supplier on january 19th. So it's it's really important to to think of the dates right when this happened to see if we qualify for the discount. So record the purchase and payment in abc company's books. Okay. So we're gonna have two journal entries here, one for the purchase and one for the payment obviously that's what we just said. So let's let's do the purchase one first it told us we bought 300 units for $1800 right? The 1800 that's the big that's the number we want, we want dollar values. So we spent 1800 on inventory. So we're going to debit our inventory for 1800, right? Because that's what we bought. So we're increasing our inventory by 1800 but we haven't paid them yet, we're gonna pay them at a future date. Right? So we have an account payable ap for account payable of 1800 right at some future date we should have to pay 1800 to them. But what we're gonna see is that we get a discount right? Because in this situation we purchased it on the 14th and paid on the 19th, that's within our 10 day window. Right? On the 15 16 17 18 19 we paid five days later. Cool so that's within our 10 day limit to get the discount. So we're allowed to pay 3% less. Right? We got a 3% discount, let's go ahead and see what that 3% discount is. So we have 1800 times 3% 1800 times point oh three. That's $54. $54 is the amount of the discount. So we get to pay that much less instead of paying 1800. So let's see how much we do actually pay 1800 minus the 54 is 17 46. Okay so that is the actual cash that's gonna come out of our pocket, we got a discount for 54 but the actual cash is the 17 46. So in a perpetual system we just put all our entries straight up into inventory. Okay So uh the first thing we wanna do is we want to get rid of the payable right? It says that we owe $1800 what we're about to pay that money off. So we're not gonna owe the 1800 anymore. We're going to debit accounts payable for 1800 right? We no longer owe that money because we're making the payment now, how are we paying? We're gonna pay with cash. And that cash was 1746. Like we figured out above. Right? So the last thing is to make this balance we need that $54 discount. And that discount is just gonna go straight to our inventory. We're gonna decrease the value of our inventory for the amount of the discount. Okay so inventory Is gonna have a credit for the $54. All right. And this brings down the value of the inventory to what we actually paid for it. Right? We didn't actually pay 1800. We actually played paid 1746 and that's what's happening in this question. It's bringing down that value to 1746. Right? So in the first entry, our inventory, this one's gonna get a little a little close here. Our inventory went up by 1800 And our ap went up by 1800. Right accounts payable went up by 1800 in the first entry. And then what happened in the second entry? Well, our accounts payable went down by 1800. Right, so that gets rid of that change. And then our cash went down. I'll put the cash over here by 1746. And our inventory went down by 54. Okay, so if we were to net this amount in inventory, right, it went up by 1800 and then down by 54, that's the 1746 right there. Right, so inventory went up by 1746 and cash Went down by 1746. Right, so our assets stayed equal. There are liabilities stay equal and our equation balances. Right, so cool. Let's go ahead and pause here and then do a practice problem in the next video, you guys can take a stab at this.

On April 12, a company purchased goods worth $14,000 on account with terms of 2/15 net 30. The company paid its supplier on April 25. In a perpetual system, the journal entry to record the payment on April 25 would include: